Costco (COST) Q3 Earnings Beat Amid Tough Retail Scenario

After reporting negative earnings surprises in the first and second quarters of fiscal 2017, Costco Wholesale Corporation COST made a strong come back with earnings beat in the third quarter, consequently sidelining the woes which have gripped the brick-and-mortar retailers for some time now. Total revenue also came ahead of the Zacks Consensus Estimate breaking its long streak of missing the same in the preceding nine quarters. As a result, shares of this Zacks Rank #3 (Hold) company were up roughly 2% during after-market trading session yesterday.

This Issaquah, WA-based company posted adjusted quarterly earnings of $1.40 per share that surpassed the Zacks Consensus Estimate of $1.31 and increased 12.9% from the prior-year period. Total revenue, which includes net sales and membership fee, came in at $28,860 million that edged past the Zacks Consensus Estimate of 28,654 million and jumped 7.8% year over year.

Costco Wholesale Corporation Price, Consensus and EPS Surprise
 

Costco Wholesale Corporation Price, Consensus and EPS Surprise | Costco Wholesale Corporation Quote

Major chains are grappling with sluggish store and mall traffic as consumers choose to shop online from the comfort of their homes. But Costco seems somewhat resilient to the challenging retail backdrop. The company in the last quarter had announced that effective Jun 1, 2017 it will raise annual membership fees.

Delving Deeper

Third-quarter net sales were up 7.9% to $28,216 million, while membership fee increased 4.2% to $644 million. However, we noticed that the rate of increase in membership fee decelerated from 5.5% registered in the second quarter.

Costco’s comparable-store sales (comps) for the quarter improved 5%. The company witnessed comps growth of 6%, 2% and 4% across the U.S., Canadian and Other International locations, respectively.

Excluding the effect of gasoline prices and foreign exchange, the company witnessed comps growth of 5% during the quarter, with the U.S., Canada and Other International comps registering growth of 5%, 3% and 6%, respectively.

Costco has been witnessing comps growth for quite some time now. Comps have increase 3% in April, 6% in March, 4% in February and 7% in January. Notably, net sales increased 5% 9%, 8% and 9% in April, March, February and January, respectively. The trend is reflected from the stock’s performance in the past six months. The stock has advanced 17.7% and comfortably outperformed the Zacks categorized Retail-Discount & Variety industry’s decline of 4.4%.

Costco’s operating income in the quarter increased 12.8% year over year to $968 million, while operating margin (as a percentage of total revenue) expanded 20 basis points to 3.4%.

Store Update

Costco operates 732 warehouses, comprising 510 warehouses in the U.S. and Puerto Rico, 95 in Canada, 37 in Mexico, 28 in the UK, 25 in Japan, 13 in Korea, 13 in Taiwan, eight in Australia, two in Spain and one in Iceland.

Financial Aspects

Costco ended the quarter with cash and cash equivalents of $4,538 million and long-term debt (including current portion) of $3,979 million. The company’s shareholders’ equity was $9,898 million, excluding non-controlling interests of $287 million.

Let’s Conclude

Costco continues to be one of the dominant retail wholesalers based on breadth and quality of merchandise offered. A differentiated product range enables the company to ensure an upscale shopping experience for its members, resulting in market share gains. Moreover, Costco continues to maintain a healthy membership renewal rate. It is also gradually expanding eCommerce capabilities in the U.S., Canada, the UK, Mexico, Korea and Taiwan.

However, Costco faces stiff competition from Sam’s Club, a division of Wal-Mart Stores Inc. WMT which follows a similar business model, pushing through high volumes of merchandise at low prices in membership-only warehouse clubs. Thus, aggressive pricing to gain market share and drive traffic amid competitive pressure may dampen sales and margins.

Key Picks

Better-ranked stocks in the retail space are PVH Corp. PVH and Burlington Stores, Inc. BURL both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

PVH Corp. delivered an average positive earnings surprise of 6.5% in the trailing four quarters and has a long-term earnings growth rate of 10.7%.

Burlington Stores delivered an average positive earnings surprise of 26.3% in the trailing four quarters and has a long-term earnings growth rate of 15.9%.

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